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Severance Pay & Divorce

This pandemic has created a lot of economic suffering especially for people who have lost their jobs or been furloughed. Some employers are handling this by offering severance packages to employees in return for a voluntary quit. Some self-employed business owners have received funding under the CARES Act.

If you are divorcing your spouse and either one of you received a severance package or business funding under the CARES Act, you may be required to share with your ex.

Yes. A recent Arizona case requires that severance pay was community property where the person’s employment began and ended during the marriage. This is true even if the severance was negotiated and paid after a petition for dissolution is filed.

If you are already divorced and were awarded the community business, your ex will not have any right to the funds and will not have any obligation to repay the loan unless your divorce Agreement provides otherwise.

This is more complicated. For one thing, the PPP and CARES Act program is still a work in progress, so the answer depends on the final result. But here are some ideas:

Your ex-to-be may have an interest in this loan if it is a community property business. A community property business is one that was acquired after marriage with community funds or to which you gifted an interest to your spouse after marriage. The loan proceeds are supposed to be used to pay for designated business expenses, which means that there may practically not be any net value after these expenses are paid. However, the PPP allows a business owner to apply for forgiveness of that portion of the loan that was used for the designated business expenses. The forgiven amount is tax free. Because the business expenses are already tax deductible, the tax free benefit may be a bonus (depending on the final interpretation of the PPP forgiveness terms) – which may be an extra benefit over and above the loan.

It is also possible that your business made enough during the months covered by the virus that you could save the funds you would otherwise expend for the loan designated business expenses. You may still receive forgiveness because the loan proceeds themselves were used for the business expenses. But, your business will have more cash. Again, the final rules on these programs have not been written yet and things may change. But you should definitely flag this as an issue in your divorce.

Disclaimer: This post is intended to just highlight the various rescue programs that may be available to you and is not intended to substitute for professional tax or accounting advice. The McCarthy Law Firm is not a tax or accounting firm. Additionally, there are detailed regulations concerning each person’s eligibility. Please check with your tax advisor or accountant regarding your specific situation.

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McCarthy Family Law is a full service family law firm that services all family law issues. If you are going through a divorce or have questions about filing for divorce, we are here to assist you. Please call us at 520-623-0341 to explore your options. Turning Stress Into Solutions®.